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Loss Aversion: Why Losses Hurt More Than Gains Help
The asymmetric pain of losing versus winning
Losing $100 feels roughly twice as painful as gaining $100 feels good. This simple asymmetry explains countless irrational financial decisions.
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Kahneman and Tversky's prospect theory, developed in 1979, demonstrated that people evaluate outcomes relative to a reference point rather than in absolute terms.
The value function in prospect theory is steeper for losses than gains — a $100 loss produces roughly twice the emotional impact of a $100 gain.
Loss aversion affects every financial decision you make — from investing to salary negotiations. Recognizing it lets you override the emotional pull toward irrational choices.
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Question 1 of 3According to prospect theory, how much more painful is a loss compared to an equivalent gain?